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US CPI trails estimates, testing Powell's outlook

Core consumer price index, which excludes food and energy, rose by only 0.1% from the prior month

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People attending a job fair by the Miami-Dade County and other sponsors in Miami, Florida. The data suggests a sustained pickup in inflation may remain elusive for some time despite the lowest jobless rate in 49 years and consistent wage gains.

Washington

A KEY measure of US consumer prices rose by less than expected in April on lower used-car and apparel costs, testing the Federal Reserve's message that muted inflation will prove transitory.

The core consumer price index, which excludes food and energy, rose 0.1 per cent from the prior month, missing estimates, and 2.1 per cent from a year earlier as forecast, according to a Labor Department report on Friday. The broader CPI rose 0.3 per cent monthly and 2 per cent annually, with both figures less than projected.

The data suggests a sustained pickup in inflation may remain elusive for some time despite the lowest jobless rate in 49 years and consistent wage gains. However, prices could get a boost in the coming months after President Donald Trump increased tariffs on Chinese imports on Friday at 12.01pm, Singapore time.

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The 10-year Treasury yield briefly slipped to a session low after the CPI report and Fed funds futures showed a slight increase in odds for a 2019 rate cut by the central bank. The dollar fell. The three-month annualised change in the core gauge was 1.6 per cent, the lowest in almost two years.

Energy prices climbed 2.9 per cent from the prior month as gasoline prices jumped 5.7 per cent. Food costs decreased 0.1 per cent, while medical care costs were up 0.3 per cent.

At the same time, apparel prices dropped steeply for a second month, falling 0.8 per cent in April after a 1.9 per cent March drop that was the most since 1949. Apparel only accounts for just over 3 per cent of the CPI but a new methodology in March had dragged down the overall index.

Fed Chairman Jerome Powell has suggested the too-low inflation will prove temporary as it is driven by "transitory" factors, indicating at his latest press conference that the central bank is not leaning towards either a cut or a hike in borrowing costs. Mr Trump has pressured the Fed for a reduction in interest rates to supercharge the economy amid muted inflation, even as the tight labour market has raised wages and lowered unemployment.

Fed officials typically focus on the less-volatile core inflation measure to gauge underlying trends. Their separate preferred index - which is linked to consumer spending tallied by the Commerce Department and tends to run slightly below the CPI - rose 1.5 per cent in March from a year earlier, below the 2 per cent target, as core prices eased to a one-year low of 1.6 per cent. The April figures are due May 31.

Friday's report showed used-car prices slumped for a third month, dropping 1.3 per cent, the most since September, while new vehicle prices rose 0.1 per cent, less than the prior month. Shelter costs, which make up about a third of total CPI, continued to underpin inflation. The index climbed 0.4 per cent for a second-straight month, with owner's-equivalent rent rising 0.3 per cent.

A separate Labor Department report on Friday showed how subdued inflation is affecting consumer spending power. Average hourly earnings, adjusted for price changes, climbed 1.2 per cent in April from a year earlier, following 1.3 per cent in March. Economists surveyed by Bloomberg had forecast the core gauge would rise 0.2 per cent from the prior month and 2.1 per cent from a year earlier, with corresponding gains of 0.4 per cent and 2.1 per cent projected for the broader index. BLOOMBERG